Harrington Ltd has recently completed its annual sales forecast for the year ended 31/12/2023 - Leaving Cert Accounting - Question 9 - 2022

To prepare the raw materials purchases budget, we need to consider the requirements for production and adjust for stocks:

1. Calculate Total Requirement for Production:

   • Material A for Golden: 15,820 units * 6 Kgs/unit = 94,920 Kgs

   • Material A for Portland: 8,490 units * 8 Kgs/unit = 67,920 Kgs

   • Total Material A Required = 94,920 + 67,920 = 162,840 Kgs

   • Material B for Golden: 15,820 units * 9 Kgs/unit = 142,380 Kgs

   • Material B for Portland: 8,490 units * 12 Kgs/unit = 101,880 Kgs

   • Total Material B Required = 142,380 + 101,880 = 244,260 Kgs

2. Add Closing Stock:

   • Material A (10% of required): 16,284 Kgs
   • Material B (10% of required): 24,426 Kgs

3. Less Opening Stock:

   • Material A: 9,400 Kgs
   • Material B: 6,800 Kgs

4. Purchases Calculation:

   • Purchases for Material A = 162,840 + 16,284 - 9,400 = 169,724 Kgs
   • Purchases for Material B = 244,260 + 24,426 - 6,800 = 262,886 Kgs

Finally, convert the quantity into monetary value using the expected prices (Material A at €5.50 and Material B at €7.00):

• Cost of Material A = 169,724 Kgs * €5.50 = €933,462
• Cost of Material B = 262,886 Kgs * €7.00 = €1,836,202

Total Purchase Cost:

• Material A: €933,462
• Material B: €1,836,202

Thus, the raw materials purchases budget shows Material A costing €933,462 and Material B costing €1,836,202.

To construct the production cost/manufacturing budget, we account for direct materials, direct labor, variable overheads, and fixed overheads:

1. Direct Materials Costs Calculation:

   • Opening Stock:
     • Material A: 9,400 Kgs * €5.00 = €47,000
     • Material B: 6,800 Kgs * €6.50 = €44,200
   • Raw Materials Purchases:
     • Material A: €933,462 (from previous step)
     • Material B: €1,836,202 (from previous step)
   • Total Raw Material Costs:
     • Material A total cost = €47,000 + €933,462 - (closing stock adjustment)
     • Material B total cost = €44,200 + €1,836,202 - (closing stock adjustment)

2. Direct Labor Costs Calculation:

   • For Golden: 15,820 units * 6 hours/unit * €18 = €1,705,320
   • For Portland: 8,490 units * 9 hours/unit * €18 = €1,366,020

3. Variable Overheads Calculation:

   • For Golden: 15,820 units * 6 hours/unit * €12 = €1,140,080
   • For Portland: 8,490 units * 9 hours/unit * €12 = €915,720

4. Fixed Overheads:

   • Fixed Costs = €579,550

5. Total Production Cost:

   • Sum of all costs calculated above to obtain overall cost of manufacture.

To formulate the budgeted trading account for the year ended 31/12/2023:

1. Calculate Total Sales:

   • Sales from Golden: 15,200 units * €360 = €5,472,000
   • Sales from Portland: 8,400 units * €410 = €3,444,000
   • Total Sales = €5,472,000 + €3,444,000 = €8,916,000

2. Less Cost of Sales:

   • Calculate cost of goods sold = opening stock + production costs - closing stock (refer to production costs from previous steps).

   • Opening Stock for finished goods:

     • Golden: 900 units * €210 = €189,000
     • Portland: 750 units * €290 = €217,500

   • Total Opening Stock = €189,000 + €217,500 = €406,500

   • Calculate the correct Cost of Goods Sold and subtract from Total Sales.

   • Less Closing Stock Value (calculate based on final valuations).

3. Gross Profit Calculation:

   • Gross Profit = Total Sales - Cost of Sales

Provide detailed figures for each of these sections to tally the final gross profit.

Budget control is critical for several reasons:

1. Performance Plans: Budgets serve as performance benchmarks, guiding organizations in planning and executing financial goals.
2. Resource Allocation: Ensure resources, including finances and manpower, are correctly allocated to maximize efficiency.
3. Cost Management: Help in controlling operational costs by setting financial limits.
4. Responsibility: Designate areas of responsibility to ensure that each department meets its targets and contributes to overall performance.
5. Variance Analysis: Identify any variances in expected vs. actual figures, allowing an organization to make necessary adjustments in operations or finances.

A favourable variance occurs when the actual costs are less than the budgeted costs, indicating better-than-anticipated performance.

For example, in manufacturing:

• If the budgeted labor cost for a project was €50,000 but the actual cost ended up being €45,000, this results in a favourable variance of €5,000.
• This could arise from efficiencies in labor usage or successfully negotiating lower wage rates than originally anticipated.